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Nov 29, 2021
Recent commentary and discussions around the roles, opportunities, and challenges connected to stablecoins have made headlines both in the United States and other markets. As part of the response to these discussions, over 100 nations the world over have rapidly become very interested in developing a state-backed cryptoasset , commonly referred to as a central bank digital currency (CBDC). Getty Getty Images Setting aside the very strong opinions and positions that have been staked out by proponents of (CBDC) there are several pros and cons that can be stated on an objective basis. Pros and positives associated with this idea include 1) having the backing and legitimacy of a nation-state behind a cryptoasset, 2) lower price volatility that should result from this institutional support, and 3) finally – the increased appetite and desire of individuals and entrepreneurs to actually use crypto as a medium of exchange. Of course, for every positive or potential positive there are going to be negatives, many of which have been stated on a recurring basis by proponents of decentralized crypto options. Firstly, the very idea of a centrally managed and governed cryptoasset is anathema to many of the most engaged users of crypto. Secondly, the history of central government intervention with control over currencies, particularly the effect on purchasing power, does not seem to bode well for the implications of government managed crypto. Lastly, there is the potential that a traceable and immutable record of all transactions conducted by users of a CBDC could be tracked, i.e., the creation of a centrally controlled surveillance tool. Given these significant positives and negatives, there is clearly room for innovation and creativity in the further development of these cryptoassets; stablecoins can play a key role in this process. Let’s take a look at the critical role that stablecoins can – and should – play in the development of CBDCs moving forward. Competing monies are not new. As strange as it might sound or seem in the current era, the history or money and currencies is much more complicated than it appears. Direct government control of the currency of a nation, and the monopoly that governments have over the currencies used in a certain jurisdiction has not been the norm in most circumstances. Even in the United States, which (relatively speaking) has a short track record of self-directed monetary policy, there is a long track record of competing currencies and money sources. MORE FOR YOU Stablecoins, framed in this context, do not represent anything specifically new or innovative, but rather just a revisiting of how money and currencies have traditionally developed. In other words, stablecoins can be thought of as both returning the past while opening a door to the future of money. Competition improves outcomes. Competition, in all of its forms, invariably leads to improved outcomes, better products and services, and just since 2020 this has been demonstrated in the stablecoin space. Whether it takes the form of improved user interfaces, better transparency around how stablecoins function, or the solutions to better enable individuals and institutions to utilize these cryptoassets the trend is clear. Competing forces, products, and third-party solution providers have – and will continue to – result in improved products and services for end users. Why should CBDCs operate any differently? Especially as it relates to technology based products and solutions there is a track record of how public-private partnerships can collaborate to develop better solutions. Lessons learned from stablecoins projects, and other private sector initiatives have been, and should continue to be, applied to public sectors ideas and projects. Consistent transparency standards. Much has been written and discussed about the importance, for investors and regulators alike, to understand just what assets are underpinning certain stablecoins. Tether might have received the most coverage, as a result of USDT possessing the largest market capitalization of any single stablecoin by far, but this issue exists far beyond any single coin. In order to garner the interest and willingness to actually use stablecoins for transactional purposes there is an expectation that everyone involved in those transactions will understand how these transactions are being supported. Given the widespread efforts underway to develop CBDCs at an array of countries, with numerous options to underpin these cryptoassets, it makes sense that an interest in transparency will also exist for these instruments. Trust but verify is an old adage, and applies equally as well to CBDCs as it does to other governmental and political issues. Lessons learned, and taught, from privately issued stablecoins can and should be applied to the further development of CBDCs. The sheer volume of work and projects underway is remarkable, especially when considering just a few short years the very idea of governments tolerating – much less issuing – cryptocurrencies was a fringe idea at best. CBDCs ultimately will come to the marketplace in significant force, but that does not mean that the fate and destiny of private stablecoins is one of obsolescence. Rather, the legacy of stablecoins may be both the proliferation of private and competitive currencies and the improvement of CBDC projects that ultimately succeed. Follow me on Twitter or LinkedIn . Check out some of my other work here .